UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF CALIFORNIA
July 11, 2011
HAMMES COMPANY HEALTHCARE, LLC; HC TRI-CITY I, LLC,
LARRY ANDERSON; PAMELA SMITH; ET AL.,
The opinion of the court was delivered by: Honorable Janis L. Sammartino United States District Judge
ORDER: (1) GRANTING IN PART SUMMARY JUDGMENT; (2) DENYING PLAINTIFFS' EX PARTE MOTION FOR LEAVE TO TRI-CITY HEALTHCARE DISTRICT; FILE SUPPLEMENTAL BRIEF (ECF Nos. 38, 77) AND DENYING IN PART DEFENDANTS' MOTION FOR GRANTS IN PART DENIES IN PART
Presently before the Court is Defendants Tri-City Healthcare District,
Larry Anderson, and Pamela Smith's motion for partial summary judgment. (ECF No. 38.) Also before the Court are numerous responsive pleadings.*fn1 *fn2 (ECF Nos. 50--53, 74--75.) Having considered the parties' arguments and the law, the Court and Defendants' motion.
This action arises from the failed development of an outpatient surgery center and medical office building adjacent to the Tri-City Medical Center and Hospital in Oceanside, California (the project). Plaintiff Hammes Company Healthcare, LLC (Hammes) is a healthcare facility design and development company that works with hospitals and medical districts throughout the country. (Opp'n 1, ECF No. 50.) Plaintiff HC Tri-City I, LLC (HC) is a special purpose entity formed for the purpose of leasing the real property upon which the medical office building was to be located and constructing the medical office building. (Beam Decl. ¶ 14, ECF No. 50-2.)
Defendant Tri-City Healthcare District (Tri-City) is a public entity duly organized under California law. Defendants Larry Anderson and Pamela Smith are Tri-City's Chief Executive Officer and Director of Business and Market Development, respectively. (L. Anderson Decl. ¶ 1, ECF No. 38-4; Smith Decl. ¶ 1, ECF No. 38-2.)
In May 2005, Hammes and Tri-City entered into a letter of intent regarding the project's development. (Beam Decl. Ex. 1 (Letter of Intent).) The letter of intent outlined the transaction's proposed terms and directed Hammes to engage in certain pre-construction services related to the project. (Id.) The agreement further provided that Tri-City would reimburse Hammes for its initial development costs and pay a breakage fee if, inter alia, Tri-City decided at its sole discretion not to proceed with the project. (Id. at 6.)
In July 2007, HC entered into a ground lease with Tri-City. (Kibler Decl. Ex. 2 (Ground Lease), ECF Nos. 50-8 to -10.) The ground lease provided that HC would lease for fifty-five years the real property upon which the medical office building was to be located. (Id. at 1; id. § 2.2.) Relevant here, the ground lease contains three contingencies-two that were waivable at HC's option, and one that was a non-waivable condition precedent to construction of the medical office building. (Id. art. 15; see infra Part 2.B.1.)
In July 2008, HC entered into a space lease with Pacific View Surgery Center, LLC (Pacific View). (Kibler Decl. Ex. 3 (Space Lease).) Pacific View, a joint venture between Tri-City and its physicians, was to occupy approximately 38% of the medical office building after its completion. (Bournazian Decl. ISO Opp'n Ex. 29 (Gonzalez Dep.), at 84--85, ECF Nos. 50-11 to -18.) Tri-City also signed the space lease, but did so solely as a guarantor of Pacific View's obligations thereunder. (Space Lease 29.)
For reasons that are in dispute, the project was terminated in early 2009, and Tri-City did not reimburse Hammes or HC for any initial development costs that they incurred. This case and a related one, Tri-City Healthcare District v. HC Tri-City I, LLC, Case No. 09-CV-2334 JLS (CAB), ensued. In this case, Hammes and HC assert six claims against Defendants for: (1) breach of the letter of intent, (2) breach of the ground lease and space lease, (3) breach of the implied covenant of good faith and fair dealing, (4) fraud, (5) tortious interference with the space lease, and (6) promissory estoppel. (See generally Compl., ECF No. 1.)
Federal Rule of Civil Procedure 56 permits a court to grant summary judgment where (1) the moving party demonstrates the absence of a genuine issue of material fact and (2) entitlement to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). "Material," for purposes of Rule 56, means that the fact, under governing substantive law, could affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Freeman v. Arpaio, 125 F.3d 732, 735 (9th Cir. 1997). For a dispute to be "genuine," a reasonable jury must be able to return a verdict for the nonmoving party. Anderson, 477 U.S. at 248.
The initial burden of establishing the absence of a genuine issue of material fact falls on the moving party. Celotex, 477 U.S. at 323. The movant can carry his burden in two ways: (1) by presenting evidence that negates an essential element of the nonmoving party's case; or (2) by demonstrating that the nonmoving party "failed to make a sufficient showing on an essential element of her case with respect to which she has the burden of proof." Id. at 322--23. "Disputes over irrelevant or unnecessary facts will not preclude a grant of summary judgment." T.W. Elec. Serv., Inc. v. Pac. Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir. 1987).
Once the moving party establishes the absence of genuine issues of material fact, the burden shifts to the nonmoving party to set forth facts showing that a genuine issue of disputed fact remains. Celotex, 477 U.S. at 324. The nonmoving party cannot oppose a properly supported summary judgment motion by "rest[ing] on mere allegations or denials of his pleadings." Anderson, 477 U.S. at 256. When ruling on a summary judgment motion, the court must view all inferences drawn from the underlying facts in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).
Rule 56(a) permits a party to move for partial summary judgment. Under Rule 56(g), the court "may enter an order stating any material fact . . . that is not genuinely in dispute and treating the fact as established in the case." "This adjudication . . . serves the purpose of speeding up litigation by eliminating before trial matters wherein there is no genuine issue of fact." Fed. R. Civ. P. 56 advisory committee's note (addressing former Federal Rule of Civil Procedure 56(d)). An order granting partial summary judgment is interlocutory in character; therefore, it is not appealable "prior to the entry of final judgment in the case in the absence of a specific statute authorizing an appeal." Nat'l Union Fire Ins. Co. of Pittsburgh v. Ready Pac Foods, Inc., - F. Supp. 2d -, 2011 WL 1083374, at *3 (C.D. Cal. Mar. 18, 2011).
Defendants make numerous arguments in support of their motion. The Court addresses them as they pertain to each claim for relief.
1. First Claim for Breach of Contract
Tri-City contends that summary judgment of Hammes's*fn4
first claim for breach of the letter of intent is appropriate
"because Hammes has not incurred any damages as a proximate cause
[sic] of the District's alleged breach of the letter of
intent."*fn5 (Mem. ISO MSJ 20, ECF No. 38-1.)
Specifically, Tri-City contends that (1) all initial development costs
were incurred by HC, rather than Hammes; and (2) Hammes is not
entitled to a breakage fee because Tri-City did not terminate
the project. (Id. at 20--21.)
Plaintiffs respond that Tri-City committed anticipatory breach of the letter of intent when they bought out the physician--owners of Pacific View and terminated the project. (Opp'n 12--13.) Further, Plaintiffs contend that Hammes incurred "extensive fees and costs" separate and addition to any initial development costs incurred by HC. (Id. at 13--14.) Accordingly, Plaintiffs contend that Hammes is entitled to reimbursement of its initial development costs and a breakage fee. (Id. at 13.)
"A claim for breach of contract under California law consists of the following elements: (1) the existence of a contract; (2) performance by the plaintiff; (3) breach by the defendant; and (4) damage resulting from the breach." Alcalde v. NAC Real Estate Invs. and Assignments, Inc., 316 F. App'x 661, 662 (9th Cir. 2009) (citing First Commercial Mortg. Co. v. Reece, 108 Cal. Rptr. 2d 23, 33 (Cal. Ct. App. 2001)).
The letter of intent requires Tri-City to reimburse Hammes for its out-of-pocket initial development costs and pay a breakage fee if Tri-City "decides at its sole discretion not to proceed with the Project." (Letter of Intent 6.) Defendants contend that Tri-City "never terminated the letter of intent." (Opp'n 20.) According to Defendants, Plaintiffs provided unequivocal notice of their intent to terminate the project on June 30, 2009. (Smith Decl. ¶ 8; id. Ex. 6.)*fn6
Plaintiffs, however, contend that Tri-City terminated the letter of intent on April 3, 2009, when Defendant Smith told Plaintiffs' representative, Kevin Kraiss, that the project would not proceed.*fn7 (Kraiss Decl. ¶ 9, ECF No. 50-7.) In fact, as early as March 17, 2009, Tri-City identified termination of the management agreement with Hammes as a "potential next step" regarding the project. (Bournazian Decl. ISO Suppl. Mem. Ex. A, at 8, ECF Nos. 74-2 to -4.) Thereafter, on April 30, 2009,
Tri-City's board of directors approved termination of the project and payment of a portion of Hammes's initial development costs. (Bournazian Decl. ISO Opp'n Ex. 18.) On May 28, 2009, Hammes sent a letter confirming its understanding that Tri-City did not intend to proceed with the project.*fn8 (Kibler Decl. Ex. 19.)
Viewing this evidence in the light most favorable to Plaintiffs, the Court concludes that a genuine issue of material fact exists as to whether Tri-City unilaterally determined not to proceed with the project, thus obligating it to reimburse Hammes for its initial development costs and pay a breakage fee. According to Kevin Kraiss, Defendant Smith expressed Tri-City's intent to terminate long before Plaintiffs ever declared the ground lease void.*fn9 Although Defendant Smith denies that she ever made such a representation (Smith Decl. ¶ 11), Plaintiffs' assertion is substantiated by Tri-City's own documents. Among other facts in Plaintiffs' favor, Tri-City's board had no reason to approve termination of the project and payment of Hammes' initial development costs in April 2009-a month before Tri-City received Plaintiff's letter-unless it had already determined not to proceed.
Because a genuine issue of material fact exists as to whether Tri-City unilaterally terminated the project, a genuine issue of material fact also exists as to whether Hammes incurred any damages. Specifically, if Tri-City decided at its sole discretion not to proceed with the project, then the letter of intent obligated it to pay Hammes a breakage fee. Failing payment, Tri-City breached the letter of intent, and Hammes suffered damages at least in the amount of the breakage fee.*fn10 Accordingly, Defendants' motion for summary judgment of Hammes's first claim is DENIED.
2. Second Claim for Breach of Leases
Tri-City*fn11 contends that summary judgment of Plaintiffs' second claim for breaches of the ground lease and space lease is appropriate for three reasons. First, Tri-City contends that Hammes lacks standing to assert claims for breach of the ground lease and space lease because it was not a signatory to either contract. (Mem. ISO MSJ 9--10.) Second, Tri-City contends that Plaintiffs failed to satisfy certain conditions precedent to the ground lease and space lease and, accordingly, cannot state a claim for breach of either contract. (Id. at 11--13.) Third, Tri-City contends that there is no genuine issue of material fact that it did not default on its rent obligation under the space lease. (Id. at 13.) The Court addresses each contention below.
A. Hammes Is Not a Third-Party Beneficiary of the Ground Lease or Space Lease
The parties do not dispute that Hammes did not sign the ground lease or space lease. (Mem. ISO MSJ 9; see Opp'n 19--20.) However, as the Court recognized in its Order on Defendants' motion to dismiss, "[Hammes] may recover damages from Defendants if [it was] an intended beneficiary" of the ground lease or space lease. (Order 8, Jan. 28, 2010, ECF No. 14; see Cal. Civ. Code § 1559 ("A contract, made expressly for the benefit of a third person, may be enforced by him at any time before the parties thereto rescind it.").)
Contract beneficiaries come in two flavors: intended and incidental. "If the terms of the contract necessarily require the promisor to confer a benefit on a third person," then the third person is an intended beneficiary entitled to enforce the contract. Prouty v. Gores Tech. Grp., 18 Cal. Rptr. 3d 178, 184 (Cal. Ct. App. 2004) (quoting Johnson v. Holmes Tuttle Lincoln-Mercury, Inc., 325 P.2d 193, 197 (Cal. 1958)) (internal quotation marks and citations omitted). "[T]he third person need not be named or identified individually to be an [intended] beneficiary." Kaiser Engineers, Inc. v. Grinnell Fire Prot. Sys. Co., 219 Cal. Rptr. 626, 629 (Cal. Ct. App. 1985). It is enough that the third person be "a member of the class for whose express benefit the contract was made." Id.
Conversely, "[a] third party who is only incidentally benefited by performance of a contract is not entitled to enforce it." E. Aviation Grp., Inc. v. Airborne Express, Inc., 8 Cal. Rptr. 2d 355, 357 (Cal. Ct. App. 1992). "The circumstance that a literal contract interpretation would result in a benefit to the third party is not enough to entitle that party to demand enforcement. The contracting parties must have intended to confer a benefit on the third party." Nekerovec v. Fredericks, 87 Cal. Rptr. 2d 856, 865 (Cal. Ct. App. 1999).
"Whether the third party is an intended beneficiary or merely an incidental beneficiary involves construction of the intention of the parties, gathered from reading the contract as a whole in light of the circumstances under which it was entered." E. Aviation Grp., 8 Cal. Rptr. 2d at 357--58; see also Garcia v. Truck Ins. Exch., 682 P.2d 1100, 1105 (Cal. 1984) ("In determining the meaning of a written contract allegedly made, in part, for the benefit of a third party, evidence of circumstances and negotiations of the parties in making the contract is both relevant and admissible."). It is a question of fact. Prouty, 18 Cal. Rptr. 3d at 184. "However, where . . . the issue can be answered by interpreting the contract as a whole and doing so in light of the uncontradicted evidence of the circumstances and negotiations of the parties in making the contract, the issue becomes one of law . . . ." Id.
The purposes of the ground lease and space lease are set forth in the respective recitals. The ground lease contemplates that the leased premises would be used by HC "for purposes of constructing, owning and operating thereon an ambulatory surgery center and medical office building consisting of approximately 30,000 to 40,000 gross square feet." (Ground Lease 1.) And the space lease contemplates that HC would lease certain premises in the medical office building to Pacific View. (Space Lease 1.) Under neither agreement was Hammes to receive the right to occupy space in the medical office building or rent payments. In addition, both leases contain integration clauses stating that the contractual relationships between the parties to the respective agreements constituted the entire understandings between the parties with respect to the matters set forth therein. (Ground Lease § 14.8; Space Lease art. 2, § 32(e).) Thus, there is a strong inference that the parties to the ground lease (Tri-City and HC) and the space lease (HC and Pacific View) did not intend to benefit Hammes.
Nevertheless, Plaintiffs stridently argue that Hammes "was an intended third party beneficiary of both the Ground Lease and the Space Lease." (Opp'n 19.) According to Plaintiffs, Hammes was an intended beneficiary of the ground lease because "leasing of the land was necessary to allow the Project to be built and for Hammes to continue as the schematic designer of the building." (Id. at 3.) Plaintiffs do not explain Hammes was to benefit from the space lease.
The Court concludes that any benefit Hammes was to receive under the ground lease and space lease was purely incidental. Had the project come to fruition, Hammes presumably only stood to gain from the space lease insofar as rent that its subsidiary-HC-received would ultimately flow through to Hammes. But the mere fact that a literal interpretation of the space lease would have necessarily resulted in some benefit to Hammes does not entitle Hammes to enforce the agreement where, as here, the record is devoid of any admissible evidence that the parties intended Hammes to benefit from the space lease. See, e.g., Dayton Dev. Co. v. Gilman Fin. Servs., Inc., 419 F.3d 852, 856 (8th Cir. 2005) (holding, under Minnesota law, that third party was not intended beneficiary merely because contract for sale of fixtures required title to pass from seller through third party to buyer).
Moreover, although Hammes contends that execution of the ground lease allowed it "to continue as the schematic designer of the building" (Opp'n 3), Hammes was to receive compensation for its pre-construction services under the letter of intent (see Letter of Intent 5--6 (providing for reimbursement of initial development costs, including costs related to "prepar[ing] architectural drawings as required to obtain necessary City entitlements, market the space to prospective tenants and for construction budgeting purposes")). Plaintiffs provide no basis for the Court to conclude that the parties to the ground lease-HC and Tri-City-intended to compensate Hammes for work beyond what the letter of intent provided for. In fact, Craig Beam's declaration suggests that HC was to perform all work related to the medical office building post-execution of the ground lease. (See Beam Decl. ¶ 14 (stating that HC was "the entity to be engaged in the actual ground breaking and construction of the medical office building project").) That HC would have put Hammes's completed pre-construction services to use in performing its obligations under the ground lease is not a "benefit" to Hammes sufficient to give it standing to enforce the ground lease.
In support of its argument, Hammes offers up the declarations of Craig Beam, Michael Keller, and Todd Kibler, all of which variously state that "the Ground Lease would benefit Hammes to allow for development of the Project, and Hammes was an intended beneficiary of the Ground Lease." (Beam Decl. ¶ 16; accord Keller Decl. ¶ 6, ECF No. 50-5 (same); Kibler Decl. ¶ 4 ("Hammes was nevertheless a beneficiary of the Ground Lease, as leasing of the real property upon which the Project was to be constructed to allow the Project to proceed for the benefit of Hammes.").) Each of these declarations omits critical information, namely, how Hammes was to benefit from further development of the project. There is no evidence of how Hammes was to be paid and by who under either the ground lease or space lease. Thus, Mr. Beam's, Mr. Keller's, and Mr. Kibler's conclusory declarations fail to create a genuine issue of material fact as to whether Hammes was an intended beneficiary under the ground lease or space lease. See FTC v. Publ'g Clearing House, Inc., 104 F.3d 1168, 1171 (9th Cir. 1997) ("A conclusory, self-serving affidavit, lacking detailed facts and any supporting evidence is insufficient to create a genuine issue of material fact.").
Finally, Hammes contends that a flow chart that it provided to Tri-City in 2005 "illustrat[es] that Hammes was an intended third party beneficiary." (Opp'n 19 (citing Bournazian Decl. ISO Opp'n Ex. 36).) At most, this flow chart establishes that Hammes was an equity investor in an "ownership entity" and party to the ground lease, presumably HC. (See id.) But the mere fact that Hammes was an equity investor in HC does not establish that it was an intended beneficiary of the ground lease and space lease; if this were true, then every common shareholder of a corporation would be entitled to enforce contracts between the corporation and its customers and suppliers. The law of third-party beneficiaries counsels against such a result. Nekerovec v. Fredericks, 87 Cal. Rptr. 2d at 865.
There is no genuine issue of material fact that Hammes is not an intended beneficiary of the ground lease space lease and, accordingly, lacks standing to assert breaches of the agreements. The Court GRANTS summary judgment as to Hammes's claim for breaches of the agreements.
B. No Genuine Issue of Material Fact Exists as to Whether Tri-City Breached the Ground Lease Because Failure of the Pre-Leasing Contingency Excused it from Performance Both the ground lease and the space lease contain certain conditions precedent that had to occur before the agreements took effect. (See Ground Lease §§ 15.1, 15.2, 15.4; Space Lease art. 2, § 31.) According to Tri-City, the conditions were never met, and accordingly, the agreements were null and void.*fn12 (Mem. ISO MSJ 11--13.) HC, on the other hand, contends that the conditions were waivable at its option, and in any event, they were satisfied. (Opp'n 14--18.)
(1) The Ground Lease's Financing and Government Approval Contingencies Were Waivable at HC's Option, and the Pre-Leasing Contingency Operated in Favor of HC and Tri-City "The fundamental goal of contractual interpretation is to give effect to the mutual intention of
the parties." Byrne v. Laura, 60 Cal. Rptr. 2d 908, 916 (Cal. Ct. App. 1997). "When a contract is reduced to writing, the parties' intention is determined from the writing alone, if possible." Founding Members of the Newport Beach Country Club v. Newport Beach Country Club, Inc., 135 Cal. Rptr. 2d 505, 513 (Cal. Ct. App. 1992).
The ground lease contains three contingencies that must be satisfied before either party is obligated to perform under the agreement. (Ground Lease art. 15.) Section 15.1, the financing contingency, required HC to obtain financing "in form and substance reasonably acceptable to Lessee." (Id. § 15.1.) If satisfactory financing was not forthcoming, HC could notify Tri-City of its inability to obtain financing and declare the lease null and void based on the contingency, and Tri-City would be on the hook for 50% of HC's initial development costs. (Id.) However, if HC did not so notify Tri-City, then the lease remained "in full force and effect" and the contingency would "be deemed to be waived." (Id.) This provision is clear on its face-if HC could not obtain satisfactory financing, it could waive the financing contingency, and the lease would remain in full force and effect. Thus, section 15.1 operates solely in HC's favor.
Section 15.4, the governmental approvals contingency, required HC to use "commercially reasonable efforts to obtain all required governmental approvals for the development and construction of the Improvements in the manner intended by" HC. (Id. § 15.4.) If HC could not obtain the required governmental approvals, it could notify Tri-City and declare the lease null and void, and again, Tri-City would be on the hook for a portion of HC's initial development costs. (Id.) However, if HC did not so notify Tri-City, then the lease remained "in full force and effect" and the contingency would "be deemed to be waived." (Id.) Like the financing contingency, the import of this provision is clear-if HC did not obtain the required governmental approvals, it could waive the governmental approvals contingency, and the lease would remain in full force and effect. Thus, section 15.4 also operates solely in HC's favor.
Section 15.2, the pre-leasing contingency, however, is a paradigm of poor draftsmanship, so determining the parties mutual intent is a challenging endeavor indeed. The provision expressly prohibited HC from commencing construction unless it had entered into leases with qualified medical tenants covering at least 70% of the rentable square feet of the medical office building. (Id. § 15.2(a).) Although the provision purportedly could be met "at [HC's] sole option," it did not give HC the right to waive the pre-leasing contingency. (Id.) In fact, HC could not commence construction until Tri-City consented to the contingency's satisfaction. (Id. ("The Pre-Leasing Requirement may be met . . . upon Lessee delivering to Lessor leases covering not less than seventy percent . . . of the rentable square feet of the MOB . . . and Lessor consenting to the satisfaction of the Pre-Leasing Requirement . . . ." (emphasis added)).) If HC could not obtain the required leases before December 31, 2007, it had three options: (1) it could give Tri-City the option to enter into a back-up lease (id. § 15.2(b)(1)); (2) it could extend the deadline for ninety days (id. § 15.2(b)(2)); or (3) it could terminate the lease (id. § 15.2(b)(3)).
Ultimately, this provision gave HC two options: satisfy the contingency and obtain Tri-City's consent to satisfaction, or terminate. If HC could not obtain the required leases, it could not waive the contingency because Tri-City retained the right to withhold consent. Thus, section 15.2 operated in favor of both parties; if HC failed to satisfy the pre-leasing contingency, neither party was obligated to perform under the lease.
(2) Failure of the Ground Lease's Pre-Leasing Contingency Excused Tri-City from Performance Because the ground lease's financing and governmental approval contingencies were waivable
at HC's option, HC need not show that they were satisfied to prevail on its breach of contract claim. Accordingly, the Court only must determine whether the pre-leasing contingency was satisfied.
The pre-leasing contingency is straightforward. It provides:
Lessee shall not commence, nor shall Lessee be required to commence, any construction at the Ground Leased Premises until such time as Lessee has entered into leases with Qualified Medical Tenants covering not less than seventy percent (70%) of the rentable square feet of the [medical office building], which leases shall include a fifteen (15) year triple net lease with a joint venture entity (of which Lessor shall be a party) for an approximately 15,000 rentable square foot ambulatory surgery center . . . regardless of the total rentable square footage leased . . . . The Pre-Leasing Requirement may be met, at Lessee's sole option, upon Lessee delivering to Lessor leases covering not less than seventy percent (70%) of the rentable square feet of the MOB and a statement of Lessee's intent to declare the Pre-Leasing Requirement satisfied, and Lessor consenting to the satisfaction of the Pre-Leasing Requirement, which consent may not be unreasonably withheld. (Ground Lease § 15.2(a) (emphasis added).)
HC contends that this condition was satisfied because "by December 2008, HC had commitments to lease approximately 70% of the [medical office] building." (Opp'n 17; accord K. Anderson Decl. ¶¶ 5--6, ECF No. 50-1; Kobayashi Decl. ¶¶ 10--11.) But commitments to lease did not satisfy the pre-leasing contingency-leases were required. (See Ground Lease § 15.2(a).) The provision explicitly prohibited HC from commencing construction "until such time as [it had] entered into leases with Qualified Medical Tenants" covering at least 70% of the rentable square feet of the medical office building. (Id. (emphasis added).) To obtain Tri-City's consent to satisfaction, the provision required HC to deliver those leases to Tri-City. (Id.) Because HC does not contend that it entered into leases, and instead relies solely on commitments to lease, no genuine issue of material fact exists that HC failed to satisfy the pre-leasing condition.
(3) HC's Arguments
HC advances two arguments in an attempt to save its claim for breach of the ground lease, but neither is persuasive.
First, HC contends that "any analysis of conditions precedent is not appropriate and is irrelevant since the District breached both the Ground Lease and Space Lease in early 2009, before any conditions were even at issue or due." (Opp'n 14.) But by Plaintiffs' own admission, "[t]he pre-leasing contingency was not amended and passed as of December 31, 2007." (Opp'n 4; accord Kibler Decl. ¶ 8; Ground Lease § 15.2(b) (setting December 31, 2007 as "initial pre-leasing deadline").) HC, therefore, is wrong on the facts-Tri-City's alleged termination came after the outside date for satisfaction of the pre-leasing condition. Accordingly, an analysis of whether HC satisfied the pre-leasing condition is both appropriate and relevant. Tri-City unequivocally may assert pre-leasing contingency's failure as a defense because the provision expired unsatisfied long before Tri-City allegedly terminated the project.
Second, HC contends that Tri-City's April 2009 "statements of termination estop the District from asserting that HC did not fulfill the conditions precedent months after the fact." (Opp'n 18.) HC posits that this is so because "a party is estopped from claiming a failure to perform if the party acts to 'induce forbearance on the part of the promisee or a third person and which does induce such action or forbearance.'" (Id. (quoting Aceves v. U.S. Bank, N.A., 120 Cal. Rptr. 3d 507, 515 (Cal. Ct. App. 2011)).) But HC's second argument fails for much the same reason as its first. The statements upon which HC bases its estoppel argument were made in early 2009, yet the pre-leasing contingency expired unsatisfied at the end of 2007. Unless Tri-City has a time machine, there is no way that it could have induced HC, in April 2009, not to satisfy a condition due on December 31, 2007. Once again, the laws of physics prevail.
There is no genuine issue of material fact that HC failed to satisfy the pre-leasing contingency, and HC's attempts to save its claim fall short.*fn13 Accordingly, "neither Lessor[-Tri-City-]nor
Lessee[-HC-was] obligated to perform any of the promises, covenants or conditions of [the ground lease]," and the ground lease was null and void. (Ground Lease art. 15; see also Cal. Civ. Code § 1439.) Accordingly, the Court GRANTS summary judgment of HC's claim for breach of the ground lease.
C. Failure of the Ground Lease Dooms HC's Claim for Breach of the Space Lease
HC also contends that Tri-City "specifically defaulted in its rent obligation under the space lease" when it terminated the project.*fn14 (See Opp'n 14--15.) Tri-City signed the space lease solely as a guarantor-in the event that Pacific View defaulted, Tri-City agreed to assume "any and all" of Pacific View's obligations under the space lease. (Space Lease art. 2, § 30; see also id. at 29 (Tri-City, signing "[f]or the limited purpose of agreeing to the provisions of Section 30").) Thus, TriCity's only obligation under the space lease was contingent on Pacific View's default.
HC proceeds, as it must, on a theory of anticipatory breach.*fn15 *fn16 "Anticipatory breach occurs when one of the parties to a bilateral contract repudiates the contract. The repudiation may be express or implied. An express repudiation is a clear, positive, unequivocal refusal to perform; an implied repudiation results from conduct where the promisor puts it out of his power to perform so as to make substantial performance of his contract impossible." Mammoth Lakes Land Acquisition, LLC v. Town of Mammoth Lakes, 120 Cal. Rptr. 3d 797, 820 (Cal. Ct. App. 2010) (citations omitted) (quoting Taylor v. Johnston, 539 P.2d 425, 430 (Cal. 1975)). "Although it is true that an anticipatory breach or repudiation of a contract by one party permits the other party to sue for damages without performing or offering to perform its own obligations, this does not mean damages can be recovered without evidence that, but for the defendant's breach, the plaintiff would have had the ability to perform." Ersa Grae Corp. v. Fluor Corp., 2 Cal. Rptr. 2d 288, 295 (Cal. Ct. App. 1991) (citation omitted).
Here, because HC failed to satisfy the ground lease's pre-leasing contingency, HC cannot establish that it would have had the ability to perform its primary obligation under the space lease-construction and delivery of the medical office building. The space lease did not commence until HC delivered the medical office building to Pacific View. (See Space Lease art. 2, § 2.) And without the ground lease, HC could not construct the medical office building. (See Ground Lease 1 (indicating that ground leased parcel would be used for the purposes of "constructing, owning and operating thereon," inter alia, the medical office building).) Thus, failure of the ground lease's pre-leasing contingency forever prevented HC from performing under the space lease. Even if Tri-City breached its guaranty obligation under the space lease, there is no genuine issue of material fact that HC suffered no damages. Accordingly, the Court GRANTS summary judgment of HC's claim for breach of the space lease.
3. Third Claim for Breach of Covenants of Good Faith and Fair Dealing
Defendants contend that Tri-City's arguments for summary judgment of Plaintiffs' second claim apply equally to Plaintiffs' third claim. (See Mem. ISO MSJ 11--13.) Plaintiffs, for their part, contend that genuine issues of material fact preclude summary judgment of this claim. (Opp'n 18--19.)
"It is settled that in every contract there is an implied covenant that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract." Locke v. Warner Bros., Inc., 66 Cal. Rptr. 2d 921, 925 (Cal. Ct. App. 1997) (internal quotation marks omitted). "[T]he covenant is implied as a supplement to the express contractual covenants, to prevent a contracting party from engaging in conduct that frustrates the other party's rights to the benefits of the agreement." Waller v. Truck Ins. Exch., Inc., 900 P.2d 619, 639 (Cal. 1995). A claim for breach of the covenant has five elements under California law: "(1) the parties entered into a contract; (2) the plaintiff fulfilled his obligations under the contract; (3) any conditions precedent to the defendant's performance occurred; (4) the defendant unfairly interfered with the plaintiff's rights to receive the benefits of the contract; and (5) the plaintiff was harmed by the defendant's conduct." Rosenfeld v. JPMorgan Chase Bank, N.A., 732 F. Supp. 2d 952, 968 (N.D. Cal. 2010).
Plaintiffs complain that Defendants breached the implied covenant of good faith as to the letter of intent, the ground lease, and the space lease. (See Compl. ¶ 39.) The same breach is alleged as to each agreement: "The District implemented a 'plan' to 'buy-out' the collective physician interest in Pacific View, and ultimately destroyed the Space Lease and the Ground Lease." (Opp'n 18.) Thereafter, Defendants allegedly hid from Plaintiffs their intent to cancel the project. (Id. at 18--19.) The breadth of this argument is problematic, however, because each agreement in issue has its own unique purpose and terms. Thus, the prohibited conduct varied as to each. Carma Developers, Inc. v. Marathon Dev. Cal., Inc., 826 P.2d 710, 727 (Cal. 1992) ("[T]he scope of conduct prohibited by the covenant is circumscribed by the purposes and express terms of the contract."). Accordingly, the Court addresses each agreement in turn.
A. Defendants Anderson and Smith
As an initial matter, Plaintiffs' claim for breach of the covenant of good faith against Defendants Anderson and Smith fails as a matter of law. This is because only parties to an agreement can be liable for breach the covenant of good faith. See, e.g., Waller, 900 P.2d at 727; Locke, 66 Cal. Rptr. 2d at 925. Because neither Defendant Anderson nor Defendant Smith was a party to the letter of intent, the ground lease, or the space lease, they are not proper targets of a claim for breach of the covenant of good faith.
B. Letter of Intent
The letter of intent's purpose is set forth-straightforwardly enough-under the heading "Purpose." (Letter of Intent 1.) Specifically, the letter of intent indicates that it "is not intended, except for the provisions relating to the parties' obligations with respect to the Initial Development Costs, to be a binding agreement but is intended merely as a statement of the present intentions and understandings of the parties and an outline of the economic and business of the proposed transaction to determine whether there is a basis acceptable to parties before proceeding toward final and binding agreements." (Id.) The terms set forth in the letter of intent remained subject to further negotiation and did not bind either party. (Id.) Thus, by signing the letter of intent, the parties agreed to negotiate in good faith toward final and binding agreements, and Tri-City agreed to reimburse Hammes for its initial development costs. (See id. at 5--6.) Such were the purposes of the agreement-nothing more, nothing less.
Accordingly, the covenant of good faith implied in the letter of intent prohibited Tri-City from
(1) undermining Hammes's ability to negotiate in good faith towards a binding agreement and
(2) undermining Hammes's ability to incur and obtain reimbursement for its initial development costs. Clearly Tri-City did not do the former, as Tri-City and HC subsequently reached a final, binding agreement embodied in the ground lease. Nor did Tri-City do the latter. Hammes does not allege that Tri-City prevented it from engaging in pre-construction activities for which it was to obtain reimbursement; it alleges that Tri-City did not make good on its reimbursement obligation. While that might amount to a breach of the letter of intent itself, it is not a breach of the covenant of good faith. Accordingly, there is no genuine issue of material fact that Tri-City did not breach the covenant of good faith implied in the letter of intent.
C. Ground Lease
The Court also concludes that Tri-City did not breach the covenant of good faith implied in the ground lease. To prevail on a claim for breach of the covenant, the plaintiff must establish, inter alia, that it satisfied any conditions precedent to the defendant's performance. Rosenfeld, 732 F. Supp. 2d at 968. As discussed supra, there is no genuine issue of material fact that HC failed to satisfy the pre-leasing contingency, which was a condition precedent to Tri-City's performance. Accordingly, Plaintiffs' claim for breach of the ground lease's implied covenant of good faith fails as a matter of law.
D. Space Lease
Finally, the Court concludes that HC's failure to satisfy the ground lease's pre-leasing contingency spells disaster for its claim for breach of the implied covenant of good faith as to the space lease. Under California law, a plaintiff must prove damages to prevail on a claim for breach of the covenant of good faith. Rosenfeld, 732 F. Supp. 2d at 968. As discussed supra, there is no genuine issue of material fact that HC was not damaged by Tri-City's alleged breach of covenant of good faith implied in the space lease because HC failed to satisfy the ground lease's pre-leasing contingency. The failure of the ground lease's pre-leasing contingency prevented HC from building the medical office building, which construction was a condition precedent to Pacific View's rent obligation under the space lease. Thus, even if Tri-City breached the covenant of good faith implied in the space lease by implementing an undisclosed plan to terminate the project, this breach did not damage HC because failure of the ground lease's pre-leasing contingency forever prevented HC from bringing the project to fruition and obtaining the space lease's benefits. Accordingly, Plaintiffs' claim for breach of the covenant of good faith implied in the space lease also fails as a matter of law.
There is no genuine issue of material fact that HC cannot prevail on its claim for breach of the covenant of good faith. Accordingly, Court GRANTS summary judgment as to Plaintiffs' third claim.
4. Fourth Claim for Fraud
Defendants Anderson and Smith*fn17 advance several arguments for summary judgment of Plaintiffs' fourth claim for fraud. (See Mem. ISO MSJ 14--17; Reply 11--15.) Plaintiffs, however, graphically assert that "Larry Anderson and [Pamela] Smith engaged in fraud and material omissions when they formulated a 'plan' to dismember Pacific View and attempt to take Plaintiffs' construction drawings and governmental approvals without any compensation." (Opp'n 20 (emphasis added).)
"The elements of fraud, which gives rise to the tort action for
deceit, are  misrepresentation (false representation, concealment,
or nondisclosure);  knowledge of falsity (or 'scienter');
 intent to defraud, i.e., to induce reliance;  justifiable
reliance; and  resulting damage." Small
v. Fritz Cos., 65 P.3d 1255, 1258 (Cal. 2003) (internal quotation
marks omitted). Problematically, the theory of fraud alleged in the
complaint diverges markedly from that outlined in Plaintiffs' opposition to Defendants' motion. The
complaint alleged that Defendants Anderson and Smith committed fraud
by repeatedly communicating to Plaintiffs that the project would go
forward, even after Defendants had determined not to go forward with
the project. (See Compl. ¶¶ 48--49.) One can easily discern how Plaintiffs planned to establish
reliance and damages in that scenario-in reliance on Defendants' false
assurances that the project would go forward, they continued to incur
initial development costs and were damaged in that amount.*fn18
Now, however, Plaintiffs are relying on a theory of fraud
that, while featured in the complaint, played only a minor role. (See
Compl. ¶ 50.) Specifically, Plaintiffs allege that Defendants
committed fraud by representing to Plaintiffs that "the District would
not utilize the Hammes and HC design documents for any future medical
office building" when, in actuality, Defendants "had already
determined to utilize Plaintiffs' design and construction documents
and still attempt to build the surgery without Plaintiffs." (Opp'n
21.) For the reasons detailed below, the Court concludes that
Plaintiffs cannot establish the necessary elements of reliance or
damages under this theory.
A. There Is No Genuine Issue of Material Fact that Plaintiffs Did Not Actually Rely on Defendants' Alleged Misrepresentations To prevail on a fraud claim, "[t]he plaintiff must allege and prove that he actually relied upon
the misrepresentations, and that, in the absence of fraud, would not have entered into the contract or other transaction." Mega Life & Health Ins. Co. v. Superior Court, 92 Cal. Rptr. 3d 399, 406 (Cal. Ct. App. 2009). "Actual reliance occurs when the defendant's misrepresentation is an immediate cause of the plaintiff's conduct, altering his legal relations, and when, absent such representation, the plaintiff would not, in all reasonable probability, have entered into the transaction." Cadlo v. Owens-Ill., Inc., 23 Cal. Rptr. 3d 1, 5 (Cal. Ct. App. 2004). Reliance may be inferred from the circumstances attending the transaction. Boeken v. Philip Morris Inc., 26 Cal. Rptr. 3d 638, 653 (Cal. 2005).
Here, Plaintiffs' representatives variously declare that they relied on Defendants Anderson and Smith's assertions that they did not intend to proceed with the project. (See K. Anderson Decl. ¶ 19; Kraiss Decl. ¶ 14.) However, Plaintiffs entirely fail to identify how they relied on Defendants' statements-they do not identify a change in their legal relations that would not have occurred but for Defendants' alleged misrepresentations. Nor can the Court infer a change in economic position from the circumstances attending the transaction. When Defendants informed Plaintiffs of their intent to terminate the project, Plaintiffs ceased working on the project. It is difficult to fathom that Plaintiffs would have acted differently had Defendants disclosed their intent to continue the project without Plaintiffs. Absent some evidence that they would have acted differently but for Defendants' alleged misrepresentations, Plaintiffs' fraud claim must fail. See Wilkins v. Nat'l Broad. Co., 84 Cal. Rptr. 2d 329, 338 (Cal. Ct. App. 1999).
B. Even if Plaintiffs Relied, There Is No Genuine Issue of Material Fact that Defendants Did Not Suffer Damages Plaintiffs also fail to establish that they suffered damages on account of Defendants Anderson and Smith's alleged misrepresentations regarding their intent to proceed with the project. According to Plaintiffs' controller, Debra Cummings, Plaintiffs incurred $88,040 in costs that they would not have incurred if Defendants had terminated the project on March 10, 2009. (Cummings Decl. ¶ 5.) However, the damages alleged in Ms. Cummings's declaration only are relevant to the theory of fraud alleged in the complaint, a theory that fails for the reasons stated supra, note 18. Plaintiffs offer no evidence to establish that they were damaged by Defendants' alleged failure to disclose their intent to continue the project without Plaintiffs, which occurred in April 2009. Conspicuously absent from the Plaintiffs' pleadings is any allegation that Defendants Anderson and Smith actually did convert Plaintiffs' construction documents for their own use. Accordingly, there is no genuine issue of material fact that Plaintiffs were not damaged by Defendants alleged fraud.
Because there is no genuine issue of material fact that Plaintiffs cannot establish at least two necessary elements of their fraud claim, the Court GRANTS summary judgment as to this claim.
5. Fifth Claim for Tortious Interference with the Space Lease
Defendants contend that HC*fn19 cannot prevail on its claim for tortious interference with the space lease because HC's termination of the ground lease was the proximate cause of any damages HC incurred. (Mem. ISO MSJ 19.) Although the Court agrees that HC was not damaged by any alleged tortious interference with the space lease, it reaches that conclusion for a different reason.
A tortious interference with contractual relations claim has five elements: "(1) a valid contract between plaintiff and a third party; (2) defendant's knowledge of this contract; (3) defendant's intentional acts designed to induce breach or disruption of the contractual relationship; (4) actual breach or disruption of the contractual relationship; and (5) resulting damage." Pac. Gas & Elec. Co. v. Bear Sterns & Co., 791 P.2d 587, 589--90 (Cal. 1990).
Even if Defendants interfered with the space lease, HC was not damaged. As discussed supra,
this is because failure of the ground lease's pre-leasing contingency prevented HC from realizing any benefits under the space lease. Accordingly, there is no genuine issue of material fact that HC was not damaged by any alleged interference with the space lease, and the Court GRANTS summary judgment as to this claim.
6. Sixth Claim for Promissory Estoppel
Defendants contend that summary judgment of Plaintiffs' sixth claim for promissory estoppel is appropriate because "Plaintiffs have offered no evidence that their economic position changed following the April 2009 meeting with Ms. Smith and Mr. Anderson . . . ." (Reply 15.) Plaintiffs, however, assert that triable issues of material fact exist as to this claim. (Opp'n 24--25.)
"Promissory estoppel applies whenever a promise which the promissor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance would result in an injustice if the promise was not enforced." Aceves, 120 Cal. Rptr. 3d at 515 (internal quotation marks omitted). "Cases have characterized promissory estoppel claims as being basically the same as contract actions, but only missing the consideration element." US Ecology, Inc. v. California, 28 Cal. Rptr. 3d 894, 906 (Cal. Ct. App. 2005).
Like Plaintiffs' fraud theory, the promissory estoppel theory advanced in the complaint differs from that asserted in opposition to Defendants' motion. The complaint alleges that Defendants "repeatedly promised and reassured Plaintiffs that the Project would proceed" (Compl. ¶ 59), "all the while never intending to proceed" (Compl. ¶ 61). Now, however, Plaintiffs allege that they relied on Defendants Anderson and Smith's "representations of termination and promises of payment of at least $450,000." (Opp'n 25.) Plaintiffs contend that they "expressly relied upon these promises, and understood the Project was terminated, they should cease all work, and yet payment would be made to them." (Id.)
Plaintiffs' new theory simply does not support a promissory estoppel claim. Even if Defendants gratuitously promised to pay Plaintiffs $450,000, Plaintiffs fail to identify any "substantial change of position, either by act or forbearance, in reliance on [the] promise." Youngman v. Nev. Irrigation Dist., 449 P.2d 462, 468 (Cal. 1969). Plaintiffs' representative's statement that he "relied on the District's termination" is plainly insufficient because it does not identify how Plaintiffs position changed. (Kraiss Decl. ¶ 22.) In fact, it is difficult to fathom what "acts or forbearance" on Plaintiffs' part could have resulted from Defendants' alleged promise. Plaintiffs had already stopped working on the project; they couldn't "stop more." Because Plaintiffs have failed to identify a substantial change of position in reliance on Defendants' allegedly gratuitous promise, the Court GRANTS summary judgment of Plaintiffs' promissory estoppel claim.
For the reasons stated, the Court the Court GRANTS Defendants' motion for partial summary judgment as to Plaintiffs' claims for breach of the ground lease and space lease, breach of the implied covenant of good faith and fair dealing, fraud, tortious interference with the space lease, and promissory estoppel. The Court DENIES Defendants' motion for partial summary judgment as to HC's claim for breach of the letter of intent.
IT IS SO ORDERED.